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Focus on Leadership - March 2012

Interview by Kemp Harr

Bob Shaw sold Shaw Industries to Berkshire Hathaway in early 2001 and stepped down as head of the company in 2005. Over the years, Shaw developed the reputation for operational efficiencies, which gave him a low-cost advantage. But his real legacy has been entrepreneurial change.

It takes guts to take some of the risks that Bob Shaw has taken, but many of these risks have helped shape this industry into what it is today. He cut out distribution, he sold direct, he backwards integrated, he consolidated—all of these decisions were risky and many of them paid off. Today, he is back in the floorcovering business and it looks like his penchant for change is as strong as ever. And with Engineered Floors, the sole focus is on polyester carpet for the residential market. The opportunity to start with a blank page, as Shaw calls it, was one the entrepreneur couldn’t resist, and neither was the opportunity to control the fastest growth area of soft floorcovering. In business only a year and a half, Engineered Floors employs 600 individuals and is channeling capital back into northwest Georgia, one of the major motivations the wealthy industrialist had for jumping back into business at the age of 80.

Q: Many experts believe that the annual revenue of carpet has fallen below 50% of the total revenue of the U.S. flooring market. Will carpet regain share?A: I think we’ve had a total change, quite frankly. Sixty percent to 70% of hard surface is in new construction. Only 30% to 35% of carpet is in new construction. As new construction goes down, the carpet level is coming up. Multi-family, 80% of which is soft surface, is the fastest growing area of the floorcovering business, simply because once you kick someone out of a house, they have to go someplace, and they go to an apartment. Vacancy is less than 6%; three years ago it was 15%.

Soft surface will gain even in new construction. FHA housing is going from 2,300 square feet back to 1,400 or 1,500 square feet, for something that can be afforded. Go ask any housewife if she’d rather have a playroom or a third bedroom. Any housewife is going to say that she wants a third bedroom. That space is going to be carpet. If we shrink a house to something we can afford, we are going to have the same amount of carpet that we have today. We are going to get a larger portion of tomorrow’s business.

No one is sure what portion of hard surface is being imported from outside of the U.S. I think everyone gets confused, quite frankly, on how much is domestic. I doubt very seriously that it would be over 50% if you were just talking about the domestic marketplace. Almost 0% of soft floorcovering comes from outside the U.S.

Q: What was your motivation to get back into the business after taking several years off?A: I didn’t take several years off. To get into the business we’re in, you are talking about planning for 24 to 30 months ahead of time.

From a practical standpoint, we saw a step-change in the carpet industry that wasn’t being filled, and that was solution dyed polyester. You look at it right now, it is the growth of the industry. We get the polyester chip and add 70% of the value to the product ourselves. The more value you add, the greater chance you have of making a profit.

We’re down to one basic thing: whoever makes the yarn is going to control the avenue to market. Whoever controls the avenue to market will eventually control the profitability. You control the avenue to market by having a long contribution to the market, meaning your dollars are spent adding value to the product. Once you add more value than your competitors, you have a better chance of making more dollars than your competitors because you have more dollars to work with.

Q: You saw an innovation opportunity, didn’t you?A: Well, yeah, it was as clear as it could possibly be. There wasn’t anything magic about it. We saw PET yarn, introduced to the carpet industry in 2003, starting to pick up share in continuous fiber polyester. Then we saw the growth of that on a fairly rapid basis. If you see an industry declining and a fast growth area in one part of that marketplace, you’ve got a pretty good thing. You’re bucking a trend.

Q: Do you think you’ll always focus on polyester?A: Both nylon staple and filament are on the decline. Why would we ever get into a market that is shrinking rather than growing?

Q: Because on the upper end of the market, some people believe that nylon is a better fiber.A: We don’t believe that. We see phenomenal performance out of our products. Like any polymer, you can make it perform or not perform depending on how you construct it—just like nylon. If you put in the right construction and the right technology, there’s no problem with polyester’s performance.

You don’t start with used equipment and try to convert it to make the right product. You have to start with new equipment. You start with a blank piece of paper rather than starting with some old extrusion type of thing and trying to convert it into a new yarn system.

Q: What makes Engineered Floors different?A: We happen to make the best yarn there is in the industry for making carpet; that’s what makes us different. I’ve never, in the almost 60 years I’ve been in the business, seen a more versatile yarn or a better yarn than what we make. But it starts with how you process the fiber and particularly how you color the fiber. We talk about being green. The best way to do it is not to use oil, then you don’t have to recover all the oil that you used. That’s the advantage of solution dyeing. It’s a much more economical way of putting dye on that does not use water. Plus the dye is bleach resistant.

Q: It seems like you’re pretty involved with the engineering of the product.A: No, I don’t care how it’s made. I want to know what the quality of the product is after it’s made.

Q: What do you consider most important for achieving success?A: Well, first of all, you pick your industry, then you pick the right timing and the right part of the industry. You pick a market that you can afford. If you can hit the first wave on a growth industry, that’s where most of the money is made.

Number two is having the money to afford it. Then you find people that need a job, and you bring them in and coach them.

Q: Polyester has one Achilles heel, and that is its soiling properties, right?A: Absolutely wrong. That’s the only thing that people in the nylon business can possibly say. When you’re talk about soiling, you’re talking about spinning oils. And we use less spinning oil on our product than they do on nylon. We put on less than anyone in the industry, then we couple that with the PureColor and the SoilShield. Our SoilShield is a different chemistry than anyone else uses. We have tested our carpets head to head with nylons and polyesters, and we know that we fare very well. In our case, the innovation is around our soiling technology. All polyesters are not equal.

Polyester has grown from 75 million pounds in 2004 to 500 million pounds in a market that has declined by 47%. If you take a trend line of the growth of polyester, it will be more than 50% of the total face fiber industry, and if you look at residential, it will be considerably more. Polyester has not hit the loop pile market yet. It will, and it will hit marketshare.

Q: Are you seeking to be a style leader as well?A: Let’s face it; most of what you see in the residential floorcovering market is a commodity. We make no bones about it. We have spent the last 40 years trying to be part of a decorating thing, and the fact is that we follow somebody else on the trend line. We don’t set the trend line.

Q: What are the long-range growth opportunities for Engineered Floors?A: We’ve been in business for a grand total of a year and a half. We are talking about what’s happening next year. We have blinders on. We don’t look at something five years down the road.

Q: Why do you want to be in business at the age of 81 if you don’t have to be?A: For the last ten years, I’ve seen capital flowing out of northwest Georgia, rather than flowing in. I think there is an obligation to where you made your money to start with, and this was a great opportunity because it allowed us to start with a blank sheet of paper and make sure we could have an advantage from the start. This has allowed us to bring back jobs to northwest Georgia on a permanent basis.

We have never seen a cycle—at least in the 50 years I’ve been in the business—that went as low as this cycle. By the same token, we have no foreign competition, and we haven’t lost our marketshare as far as square feet to any other product. As far as I can see, we’re not going to lose. If you have a segment that is growing at 35% in a declining market and you own the first wave of that business, if you do a good job and don’t hurt your reputation, you should be able to win that business.

Q: Do you have a concern for the up and coming professionals in the business?A: Yes, I think that morals are an extremely important part of business. Once you take the morals out of it, honesty and what have you, you are subject to losing the respect of the business and the country. We have to constantly avoid that.

Q: We’re sitting today in Dalton’s old city hall, which is where you have your offices. Why did you choose this building?A: It’s a pretty old building that didn’t need to be torn down, and they didn’t have any use for it, so that’s why we’re here. When you really get down to the prospects of the South, we’ve had the textiles industry move away. We lived on the textiles industry for years. All we’re looking for now is something to build northwest Georgia.

We didn’t have any capital in Dalton, Georgia 50 or 60 years ago, then all these people started getting their monies together. One would go into the dye business, and one would go in the yarn business, and one would go in the tufting business. And somewhere along the line, we put all that capital together, and DuPont came down and sold us some yarn, and we made a living. We saw probably the most capital in the Southeast concentrated in a 30 mile radius of Dalton. The reason we haven’t done well over the past ten years is that we have taken our capital and moved it away and made the decision as flooring manufacturers that carpet isn’t a viable source for our growing marketplace, which is wrong.